Should I Use a Trust or a UGMA/UTMA Account to Protect Assets Intended for My Minor Child?

A Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account is often used by parents or grandparents as a tool to transfer assets to a minor. These accounts allow a minor to legally own assets, with an appointed custodian managing the account until the child reaches the age of majority. UGMA and UTMA accounts serve as relatively straightforward options for passing wealth to a younger generation, but they may not always be the best choice in an estate plan when compared to the flexibility and control provided by a trust. The Indianapolis attorneys at Frank & Kraft explain the key features of UGMA and UTMA accounts and how they compare to a trust to help you decide the best option for your estate planning needs.

How UGMA and UTMA Accounts Work

The UGMA and UTMA acts were designed to simplify the process of gifting assets to minors. A UGMA account allows minors to own cash, stocks, and bonds, while a UTMA account expands this list to include real estate and other types of property. The custodian manages the account, making decisions about how to invest and use the assets in the minor’s best interests. Once the minor reaches a specified age, control of the assets passes entirely to the child. In Indiana, the age of majority for a UTMA account is 21 years old, while the age of majority for a UGMA account is 18 years old.

One of the primary benefits of UGMA and UTMA accounts is their simplicity. There is no need to set up a formal trust or go through a lengthy legal process. The accounts also provide tax benefits because income from assets held in the account is taxed at the minor’s lower tax rate, within limits. One of the key limitations, however, is the loss of control once the minor reaches the age of majority. At that point, the child gains full access to the assets and can use them as they wish, even if the custodian or other family members do not agree with their decisions. This loss of control can be problematic if the child is not yet financially responsible.

UGMA and UTMA accounts can be useful for parents or grandparents who want to make relatively small gifts to minors while avoiding the complexities of a trust. They allow for an easy transfer of assets and can help teach children about financial management. These accounts are often used to fund a child’s education or other specific goals.

Comparing UGMA/UTMA Accounts to a Trust

While UGMA and UTMA accounts are relatively simple and cost-effective, a trust offers a more flexible and comprehensive option for passing assets to a minor. A trust allows the Grantor to specify exactly how and when the assets should be used, even long after the child reaches adulthood. For example, a Grantor may decide that the assets should be used for the child’s education or medical expenses, with the remainder distributed in increments over time to avoid irresponsible spending.

Another major difference is that a trust allows the Grantor to choose when the child will gain full control of the assets. Instead of automatically transferring at 18 or 21, the trust can be structured to delay access until the child is more mature or reaches a specific milestone, such as graduating from college or reaching age 30. This provides added protection if the child is not financially responsible at a young age.

In addition to the flexibility of asset distribution, a trust also offers greater protection from creditors or lawsuits. Assets held in trust are generally shielded from creditors, which can be a significant benefit if the beneficiary encounters financial difficulties. UGMA and UTMA accounts, by contrast, do not provide any such protection once the assets pass to the child.

Do You Have Additional Questions about UGMA or UTMA Accounts?

For more information, please join us for an upcoming FREE seminar. If you have additional questions about how a UGMA or UTMA account fits into your estate plan, contact the experienced Indianapolis estate planning attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.

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